Intellectual Property Rights, Technology Transfer and International Trade

Abstract

I study the short- and long-term effects of regional trade agreements (RTA) with strict intellectual property (IP) provisions. An empirical analysis using gravity methods suggests that regions signing these agreements share more technology in the form of technology licensing following the year of enforcement. I set up a multi-country model with endogenous productivity through innovation and adoption to quantify the effect of such agreements on innovation, growth and welfare. Adopters pay royalties to innovators for the use of their technology; the model allows for various degrees of IP rights enforcement ranging from pure imitation to perfect enforcement of IP rights. An improvement of IP protection in exchange for market access increases welfare, growth and innovation in the world. Developed countries benefit from a higher return to innovation and a lower home trade share, accruing welfare gains both in the short and long term. Developing countries are impacted through three channels: (i) internal IP reforms increase the return to domestic innovators,(ii) lower trade costs increase profits from exports, and (ii) higher royalty payments reduce the return to adopters. A counterfactual exercise shows that while the first two forces dominate in the long run, there are short-term losses from a lower return to adoption.